EGC1 - Chapter 5: Utility & Game Theory

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What does the utlility function for a risk taker show?

An increasing marginal return for money.

What does the utlility function for a risk avoider show?

A diminishing marginal return for money.

What property do all utility functions posess?

More money leads to more utility

decision analysis

a single decision maker seeks to select an optimal decision alternative after considering the possible outcomes of one or more chance events.

game theory

two or more decision makers are called players, and they compete as adversaries against each other. Each player selects a strategy independently without knowing in advance the strategy of the other player or players. The combination of the competing strategies provides the value of the game to the players.

saddle point

Whenever the maximum of the row minimums equals the minimum of the column maximums, the players cannot improve their outcomes by changing strategies.

pure strategy

Maximum(Row minimums) = Minimum(Column maximums) - optimal for both players.

Optimal solution for mixed strategy

optimal solution for each player is to randomly select among the alternative strategies.

A dominated strategy exists if

another strategy is at least as good regardless of what the opponent does.

two-person, constant-sum game

occurs when the payoffs for the strategies chosen sum to a constant other than zero.

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